Studying for higher education (whether in India or outside India) is often dependent upon financial assistance, and education loans, in whatever form, have been the path of least resistance for students and their families. Did you know that the payment of your education loan can also lead to making significant savings in your income tax?
Under Section 80E of the Income Tax Act, 1961, an individual, as a legitimate tax deduction, can claim the deduction on the interest on your education loan. As a result, you are able to lower your taxable income and not only reduce the cost of borrowing, but make your monthly EMI’s a bit easier to manage.
Whether you’re a student who took the loan yourself or a parent who co-signed it, understanding how Section 80E works can help you maximize tax savings during the repayment phase. The best part? There’s no upper limit on the amount of interest you can claim!
In this complete guide, we will cover everything you will need to know about Section 80E from eligibility and repayment period, through the stages of making a claim, to provide examples. By the end of this blog, you’ll not only understand how to claim the deduction correctly, but also learn how to strategically reduce your education loan burden, legally and efficiently.
What is Section 80E of the Income Tax Act?
Section 80E of the Income Tax Act, 1961, is an extremely beneficial tax saving provision make it easier for Indian taxpayers to pay off education loans taken on behalf of themselves, children or spouses. Typical provisions usually have caps and limits for deduction but Section 80E allows taxpayers to claim a tax deduction on the interest paid on education loans for higher education that do not have an expense cap. Section 80E has been a huge help for middle-class families and those students studying overseas and other working professionals that are able to seek postgraduate study.
The goal of Section 80E was to facilitate the study of higher education and reduce the burden of education loans. As we are seeing increasing tuition fees, particularly in the area of higher education related to engineering, medicine, and foreign MBAs, Section 80E gives families an opportunity to lower or reduce their taxable income while paying for the education loans they incurred that directly helped them in their skill development and professional advancement and or self-advancement.
Who is Eligible for Tax Deduction Under Section 80E?
One of the frequently asked questions regarding Section 80E is: “Who is entitled to claim the tax benefit?”. The good news is that there’s a wide scope for potential recipients, including not just students themselves, but also parents or guardians of students who are taking education loans to support higher education. This is what to consider to be entitled to ask for the Section 80E tax deduction:
1. The Individual Paying the Interest
Section 80E excludes any tax deduction from being claimed jointly by two individuals (parents or guardians to students, for example). Only individual taxpayers are able to claim the tax deduction – not Hindu Undivided Families (HUFs) or companies. The person entitled to claim the benefit has to be the individual person who’s repaying and paying the interest off the education loan from their own taxable income. This means:
- The deduction can be claimed by the student who took the loan in their name and is repaying it.
- Or by the parent, legal guardian, or spouse who has taken the loan on behalf of the student and is repaying it.
2. Parents, Guardians, and Spouses Can Claim Too
If you’re a parent or legal guardian who has taken an education loan for your child’s higher education, you are eligible for Section 80E benefits even if you are not the student.
Who qualifies under this provision:
- Father or mother paying off the loan for their child.
- Legal guardian repaying a loan taken for their ward’s education.
- Spouse paying EMIs for their partner’s education.
Note: The deduction can only be claimed by one person either the student (if self-financed) or the parent/guardian (if they are repaying the loan).
Which Types of Loans Qualify Under Section 80E?
Not every education loan qualifies for the deduction under section 80E. You can only have the benefit on the education loans which are considered higher education loans as defined by the rules surrounding section 80E. There are several conditions that are set, namely in respect of purpose of the loan, the source of the loan and the educational institution itself.
1. Loan Purpose – Higher Education Only
Section 80E only-applies education loans for higher education (courses after the 12th-grade exam or equivalent). This higher education includes:
- Graduate and postgraduate courses
- Professional courses (MBBS, MBA, B.Tech., etc.)
- Foreign education, including tuition fees, living expenses, travel expenses.
The benefit is available if you are studying in India or aboard provided the courses you are enrolled in are considered higher education.
2. Loan Must Be from a Recognized Financial Institution
To be eligible for deduction under Section 80E, the education loan must be taken from:
- A banking company under the Business Regulation Act, 1949.
- An NBFC (Non-Banking Financial Company) registered and recognised by Reserve Bank of India (RBI).
- A charitable institution recognised by the government.
Notes: Educational loans from relatives, friends, employers or a private unregistered lender would not qualify for deductions under section 80E.
Duration of Tax Benefits Under Section 80E
One of the main aspects to Section 80E is that the tax deduction on the interest paid for an education loan is only valid for a certain amount of time. In this case, it is eight consecutive years starting from the year you begin to repay the loan.
1. For how long can you claim the deduction?
- The eight-year period will start from the year in which you start to repay the interest portion of the education loan.
- If you repaid the loan in five years, the tax benefit would be void as of when the loan was fully paid back, even if this took place before the eight years was up.
- Also, if the repayment tenure of the loan is greater than eight years, you cannot claim the deduction beyond the eight-year limitation.
2. What Happens After 8 Years?
When the eight-year period is exhausted, the tax benefit that is availed under Section 80E is forfeited, regardless of loan repayment status. This means that although you may still be making loan repayments, any interest you pay after the eight years would not be eligible for deduction as part of this section.
3. Why Does It Matter for Planning Purposes?
- This timeline is important to consider when you want to manage your finances efficiently. You want to encourage borrowers to:
- Plan their loan tenor and duration sensibly, so they have affordable monthly EMIs and to also maximize the tax benefit of this section of the Income Tax Act.
- Make a repayment schedule unnecessarily long to maximize for the deduction.
Tips to Maximize Your Section 80E Benefits
- Pay Down Early: If possible, make it a goal to pay off your education loan in the eight-year period. This allows for your deduction on all interest you pay while paying down the loan.
- Look for Scholarships and Financial Assistance: Any scholarships or financial assistance will reduce the amount of the loan required. Although this would reduce the amount you can deduct on interest paid, it also reduces the amount of overall debt obligation that can be beneficial from a financial perspective.
- Use Financial Planning: Following the completion of higher education, there are tools such as the Child Dream Planner and dedicated Child Education Plans that assist in creating a pathway of funding education costs. These tools help to balancé repayments of current loan obligations with education goals without losing financial independence.
FAQs: Section 80E Tax Benefits on Education Loan
Q. What does Section 80E of the Income Tax Act mean?
A. Under section 80E, you can claim deduction for interest on your educational loan for higher studies that reduce and help you save on your taxable income.
Q. Who can claim deductions under Section 80E?
A. The borrower who is repaying the loan, whether a student, parent, spouse, or legal guardian, can claim the deduction if the loan is taken for higher education.
Q. Does Section 80E cover the principal payment?
A. Only the interest paid on the education loan is eligible for deduction, not the principal.
Q. How long can I claim the Section 80E deduction?
A. You can claim deduction for a maximum of 8 consecutive years from the year you paid the interest.
Q. Is a loan from a private lender or NBFC eligible for the Section 80E deduction?
A. As long as it is an education loan given by a recognized financial institution, such as a bank, NBFC, or a charitable organization.
Q. Are education loans for studies abroad eligible for Section 80E deductions?
A. You can claim a deduction for interest paid on education loans for higher studies abroad, too, as long as the loan has originated from a recognized source.
Q. Is there any limit on the amount I can claim under Section 80E?
A. There is no upper limit on the interest amount eligible for deduction.
Q. Can I claim Section 80E deduction if I took the loan for my spouse or child?
A. The person repaying the loan can claim the deduction regardless of whose education the loan is for.